China experienced a 6.8% contraction in GDP in the first quarter of 2020 as retail activity and industrial output fell in the wake of its COVID-19 outbreak. Now the economy is recovering after a period of intense disruption.
Due to the path of the pandemic, Chinese finance leaders are several weeks ahead of their peers in other markets in terms of navigating the fallout of the crisis, and they are helping their businesses to prepare for “a new normal” going forward. So, what are their top priorities for the next three months — priorities that other finance leaders are likely to share?
In a recent videoconference hosted by the Association of International Certified Professional Accountants, five members who are also Chinese finance leaders outlined their focus areas:
1. Employee safety and engagement. Many Chinese businesses are under pressure, due to the contraction in the local economy, as well as the wider global slowdown. As a result, their finance teams may be working especially hard right now. Long working hours — combined with the possibility of catching COVID-19 — pose a threat to employee wellbeing. The health and safety of their teams is therefore a priority for finance leaders. Some Chinese businesses have reverted to office-based working, but others are still encouraging their staff to work from home as much as possible.
Giving teams the flexibility to work in the office, or at home, is crucial to supporting employee safety and engagement. One Chinese finance leader, who runs his own consultancy, said that finance teams are increasingly working with HR teams to support talent development more broadly within their businesses.
2. Cash conservation. Cash is the lifeblood of every business. So, a major priority of Chinese finance leaders is ensuring their organisations have enough free cash flow and liquidity to survive. Within the Chinese SME community, many businesses are asking for advice on how they can better manage their cash flow, collect timely payment from their customers, and maintain robust relationships with their suppliers. Clearly, cash flows have been impacted by the slowdown in sales that has affected most sectors. Furthermore, it is not always clear when, or even if, revenues will return to previous levels. A finance leader from the Hong Kong real estate industry said that while there is continued demand for basic residential housing, the likely reduction in travel will mean that fewer people will want to stay in hotels and serviced apartments. Also, the demand for office and commercial space in southern China is gradually reducing, meaning rents could fall, panellists said.
3. Planning. Scenario planning is more important than ever. Chinese businesses are planning for a range of different recovery scenarios, including V-shaped, U-shaped, and L-shaped scenarios. They are also looking at where they should invest and where they should cut back on expenditure. There is a high level of focus on short-term business performance.
A finance leader for a global beverages company said that the business plans on a fortnightly basis, monitoring day-by-day and week-by-week business performance. Invariably, planning is also affected by sector since the crisis has presented some sector-specific challenges. For example, businesses in the oil and gas sector have been badly affected by the collapse in demand for fossil fuels and the associated drop in oil prices. With this situation likely to continue into the medium term at least, they are updating their assumptions accordingly.
4. Supply chain agility. Supply chains are creating complexity for businesses, especially those that rely on ingredients, raw materials, and components that are sourced from all over the world. In the beverages company, the finance team is working with procurement on contingency planning relating to supply chains over three-month, six-month, and 12-month periods. They are aiming to minimise the risk of supply chain disruption over the short, medium, and long term. The finance leader of a medical manufacturing company explained that while the business is looking to ramp up orders again, it is having difficulty securing certain materials from overseas. Hence, it is looking to diversity its supply chain.
5. Digital transformation. State-of-the-art technology has allowed finance leaders to gain deep insights into the performance of their businesses during this challenging period. Finance and treasury systems give them real granularity into the numbers so that they can undertake scenario planning and analysis. Robotic process automation ensures greater accuracy of data. The panellists said their organisations plan to keep investing in technology because it enables them to quickly access trusted information that can be used to support organisation decision-making. This is crucial since organisations must make some hugely important decisions — not just about how they respond to the crisis in the short term, but also about how they adjust their long-term business models, which may otherwise be unsustainable.
China appears to have passed the worst in terms of its own pandemic outbreak. Nevertheless, “normal” working conditions are not yet fully restored, and businesses in the country continue to face significant challenges. The priorities of Asian finance leaders, as outlined here, offer some insight into those challenges. They can also help finance leaders in other markets identify their own focus areas for the uncertain months ahead.
— Andrew Harding, FCMA, CGMA, is chief executive–Management Accounting and Vicky Li, FCMA, CGMA, is regional vice-president–North Asia, both at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.